When it comes to analysing the competitive environment, one of the most effective and commonly used models is Porter’s Five Forces. The forces in the model include:
Suppliers: Bargaining Power
Suppliers have a certain level of power over the company, based on their pricing and terms of supply. For example, if there are less suppliers than buyers then this allows the supplier to set a price increase, as they have power. However, if there are more suppliers than buyers, this increases the power that the organisation have, putting the organisation in a position to negotiate terms and cost.
Buyers: Bargaining Power
Buyers have more bargaining power when there is a higher supply than demand for a product in the marketplace. This allows buyers to pressure companies to offer higher quality at lower prices. However, buyer power is decreased when there is lower supply than demand.
New Entrants: Threat of Rivalry
If a market is particularly profitable and there is a higher demand than supply, it is more likely to attract new entrants. This increases the competition and decreases the level of profitability for companies already in the market. This threat can be managed in various ways, including; patents, brand persona, government policy and regulation.
Substitutions: Threat Of Substitute Products
If there are alternative options available in your market or other markets that could meet the same needs as your products or services. For example, mobile phone cameras have improved vastly and for many people have replaced the need for a separate digital camera.
Managing the threat of substitute products requires differentiation, which can be achieved through strong branding or product patents. For example, although Apple iPods meet the same needs as other branded MP3 players, the strong branding draws people towards the iPods despite their higher price tag.
Industry: Competitive Rivalry
New competitors may be a threat, but there is also the constant threat of existing competition. Depending on your market position and customer perceptions, there could be a high level of rivalry between your own and your competitors’ products.
In other cases, there is low competitive rivalry due to various factors; low number of or even no competitors (in niche markets), differentiation, brand loyalty, etc. However, this can be constantly under threat from the emergence of newcomers or new strategies from existing competitors, so it is always important to consider.
Applying Porter’s Five Forces Model
In order to use Porter’s Five Forces model effectively, it important to work with genuine figures and be able to quantify statements. Questions to ask when performing an in-depth analysis using the model include, but are not limited:
- Which of the five forces mentioned are currently at work in the competitive environment?
- What fundamentals are driving these competitive forces?
- How likely is it that there will be any significant changes in the forces? How soon?
- What are the strengths and weaknesses of competitors in relation to the competitive forces?
- Can competitive strategies be used to impact these forces?
Understanding Porter’s Five Forces and how each force impacts the competitive environment can help to guide the company’s future marketing efforts and highlight areas of strength and weakness in their approach.